Question

Ram bikes manufactures a single product. Budgeted results and actual results for June are as follows:

Fixed Budget Actual Results Variance

Production & Sales (units) 5,000 4,850

                                                       $ $ $

Sales Revenue    750,000      751,750                     1,750 (F)

Direct Materials 350,000 363,750 13,750 (A)

Direct Labour 150,000 145,500 4,500 (F)

Variable Overhead 50,000 58,200 8,200 (A)

Rent & Rates 25,000 26,000 1,000 (A)

Other Costs       4,000                           4,600                          600 (A)

Total Costs   579,000   598,050                     19,050 (A)

Profit/Loss   171,000    153,700    17,300 (A)

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The following information relates to cost behaviour:

a.) Direct Materials cost is variable.

b.) Although basic wages are a fixed cost, direct labour is regarded as variable in order to measure efficiency/productivity.

c.) Rent & Rates is a fixed cost.

d.) Other costs consist of fixed costs of $1,500 plus a variable cost cost of $0.50 per unit made and sold.

Required: Prepare a budget that will be useful for management control purposes.

Answer 1

Budget that is useful foor management control purposes is a flexible Budget. Flexible budget is the budget for actual output.

		Flexible Budget	Actual Results	Variance	F/A
Production & Sales (Units)		4,850	4,850
Sales Revenue	$750,000*4,850/5,000	$727,500	$751,750	$24,250	F
Direct Materials	$350,000*4,850/5,000	$339,500	$363,750	$24,250	A
Direct Labor	$150,000*4,850/5,000	$145,500	$145,500	$0
Variable Overhead	$50,000*4,850/5,000	$48,500	$58,200	$9,700	A
Rent & Rates	Fixed	$25,000	$26,000	$1,000	A
Other Costs	$1,500+($0.50*4,850)	$3,925	$4,600	$675	A
Total Costs		$562,425	$598,050	$35,625	A
Profit/Loss		$165,075	$153,700	$11,375	A